What Is the Purpose of a Sale & Leaseback?

A sale-leaseback is a transaction where the owner of a piece of real estate sells the real estate to an investor who then leases it back to him. As a financing transaction, it has been very popular with commercial tenants who use sale-leasebacks to finance their expansion. Residential sale-leasebacks tend to come in two flavors: short-term to allow homeowners extra time to move, and long-term, which serve different purposes.

Short-term leaseback arrangements typically last no longer than 90 days and frequently are for just a few days. They give you extra time to vacate the property before the buyer moves in or, in the case of longer leases, may allow your children to finish the school year. These arrangements are generally structured for the convenience of both parties, rather than accomplishing a broader financial goal.

Long-term residential sale leasebacks work similarly to commercial sale leaseback transactions. They work particularly well with properties where the mortgage debt exceeds the equity. A homeowner finds an investor who is willing to buy his house. At the sale, the now-former-owner executes a long-term lease that obligates him to make monthly payments to the investor. Many such leases include an option such that the owner can buy the property back in the future. The payments in such an arrangement are often significantly less than the property's original mortgage payments.

For investors, long-term sale-leasebacks are excellent opportunities in three ways. First, they offer the opportunity to buy a house at a good price -- sellers in this situation are unlikely to want to hold out for top dollar. Second, they provide a stable cash flow for a period of years that the investor can use to service the debt on the property. Third, they eliminate the need to remodel the house or to have it sit empty while the investor looks for a tenant.

For people who are upside-down on their mortgages and unable to get a loan modification that reduces their principal balance to be in-line with market values, a sale-leaseback eliminates their negative balance. Since sale-leaseback lease payments are frequently significantly less than the payments on a mortgage, they also free up monthly cash flow. While a sale-leaseback transaction ends the occupant's ownership of the property, a buy-back provision can give him an opportunity to become a homeowner again at some point in the future.